What does the Microenterprise Loan Fund Bill have to do with bouncy castles?

Here’s my take on the Microenterprise Loan Fund Bill 2012. In short, it’s like inflating a bouncy castle with a bicycle pump.

Before I talk about the substance of the Bill, the direction of which I agree and welcome, I wish to make a point about the procedure for dealing with the Bill this week. We did not get access to Bill and its digest until earlier this week and I understand the debate is to be guillotined today. This is important legislation, and it is extremely important for small and medium enterprises around the country. It is difficult for me and other Deputies to make any meaningful input given those timelines and I wanted to bring that to the Minister of State’s attention. The focus of the Government and its predecessor, and of the media much of the time, is on foreign direct investment and multinationals. We hear a good deal about that. The multinationals are very welcome and they bring many jobs, money and expertise, but we do not hear much about a focus on the SME sector. We know that 55% of jobs in Ireland come from the SME sector. Interestingly, in the UK it is around 60% and in Germany it is around 70%, which suggests not only do more than half of Irish workers work in the SME sector, but there is huge potential to grow this sector. Therefore, I welcome the Government’s focus on it. There is an issue around not only focusing on the SME sector, but ensuring that the resources of the State do not only focus on exports. Many Deputies would have heard similar stories to the ones I have heard. Many business people in Wicklow have come to me and said they had a great idea, they have gone to country enterprise boards and Enterprise Ireland but their idea is not export oriented and would not generate export oriented jobs. The county enterprise boards and the Enterprise Ireland have said, “Sorry, it is not within our terms of reference and we are not about to help you”. From an economic perspective, anything that addresses import substitution is just as important as anything that is exported based. An example would be if a person could set up a company in Wicklow or somewhere else that manufactures a product that we can buy domestically rather than something we have to buy in from abroad, as in the case of bio-fuels using rapeseed oil and so forth. Import substitution from an economic perspective in terms of balancing our trade balance is just as important as exports but for some reason – it is a legacy one in that it is something the Government did not bring in but it seems to have continued from previous Governments – we have State agencies that will explicitly say to people if they are involved in import substitution rather than exports that the conversation is over. I could not see in the Bill’s digest anything that addressed this point. I urge the Government to examine this and make sure that these loans are not just ring-fenced for high-tech export oriented companies. Economically, there is a good deal of benefit derived from import substitution as well SMEs are struggling. We know that the council rates are not falling. There are one or two noticeable exceptions but, by and large, in a time of economic crisis the council rates are not falling. The councils give good reasons for that. The Government is pulling away central funding and the councils still need to provide services, but the people who are being made to pay for them are SMEs. It is very difficult in the current economic climate and trading environment. The cost of energy prices, transport and other factor imports have not fallen all that much, but the markets into which they selling, domestically and abroad, are in a great deal of trouble. There is also a major issue for SMEs in Ireland with regard to the UK. From memory, the competitive advantage that UK firms have had over Irish firms, be they selling into each other’s markets, is about 30% just because sterling has devalued and the euro stayed strong because the ECB and the European powers were not willing to engage in quantitative easing and the kind of macroeconomic measures that would have devalued the euro. The UK is our second biggest trading partner. A 30% price disadvantage has been incurred by our SMEs in the past number of years just on the currency factor. Many of those in SMEs have come to me and said they have cut their costs, they are as lean as they can possibly be and they are paying themselves the minimum wage. They are trying to keep people at work but they are competing with people across the Border and in Britain who, during the past few years, are 30% more competitive than they are for doing nothing. There is no way they can compete with that. The SME sector in Ireland is struggling in a hugely difficult trading and currency environment. I really welcome the principle of this Bill. There are mixed messages coming from the banks, the Minister, Deputy Noonan, and the SME sector as to whether sufficient lending is happening. We have had recent research from the Central Bank of Ireland which suggests that there is a market failure and that Irish firms are not being lent money by the banks, consciously or subconsciously, when it is reasonable, correct and prudent to lend to them. We are also hearing other things. We addressed this matter with the Minister, Deputy Noonan, at the Joint Committee on Finance, Public Expenditure and Reform some time ago. He referred us to the Credit Review Office and the fact that only 44 claims had been made by companies that said the banks were not treating them fairly. He used this as evidence that there was not this great unmet demand and that they were not being treated unfairly. I have taken a look at the evidence on both sides. It seems, particularly backed up by the recent Central Bank research, that there is prejudice and that many viable SMEs in Ireland are not – some of them are – getting money and that the counter-argument of the Credit Review Office that it has only had 44 claims does not stack up. I do not know why the office has not received more claims. Perhaps many small and medium enterprises are not familiar with it. On balance, it seems there has been a market failure and in which case, this type of microenterprise fund makes a lot of sense and I welcome the principle. However, the fund is entirely inadequate. I have examined the numbers. It seems to be like trying to inflate a large bouncy castle with a bicycle pump. The original fund will be €10 million with the aim of borrowing another €25 million and, over a ten-year period the objective is to lend €9 million a year, amounting to €90 million over the ten years. This should be seen in the perspective of what happened this week when we have paid €1.1 billion to unguaranteed, unsecured bondholders. The interest on that payment in perpetuity will amount to approximately €40 million a year. On the one hand a fund is being created for struggling small and medium enterprises which are vital to the economic and social recovery of this country and this fund will lend €90 million over ten years. In the same week and covering the same period we have taken an action which will incur a €400 million cost and this is just to service the interest on €1.1 billion. I understand the Minister would like to be putting ten times this amount into the fund. I urge him to make these comparisons to his Cabinet colleagues and explain to them that the market failure cannot be solved with €90 million because it is completely inadequate. I suggest a range of policy issues for the Government’s consideration. I ask that import substitution be considered, not just for this fund but in the terms of reference for the county enterprise boards and for Enterprise Ireland. We are missing a very great opportunity. In fairness to Enterprise Ireland and the county enterprise boards, their terms of reference do not permit them. I suggest that a very simple change could be made in a number of weeks and which would aid economic growth, a stimulation of new ideas and encouraging entrepreneurs to think about new areas other than exports. The small and medium enterprise sector needs an infrastructure such as innovation hubs, mentoring and training. I acknowledge that the county enterprise boards and Enterprise Ireland do some of this work but more is needed. There are opportunities in towns around the country to set up innovation hubs and to bring, say, 30 entrepreneurs together to use shared facilities and to exchange ideas. This works very well in other countries. The fund itself will need ten times or 20 times the money. I appreciate we live in very difficult financial times. However, does it make sense to incur €400 million in interest payments on money which we do not owe but which we are paying while just €90 million is being allocated to try to deal with the market failure which is the lack of lending to entrepreneurs? It seems our priorities are wrong and it might be better if it were the other way around. Small and medium enterprises need relief on corporate rates, which are killing them. They are hit immediately from the local authority with a very large bill which they cannot pay. I ask the Minister and the Government to consider some form of council rate relief for this sector when enterprises are being set up. I ask the Minister to consider another issue. Viable businesses all over the country may have invested in property during the property bubble. That single investment is killing the small and medium enterprise and is putting people out of business. It should be possible to create a legislative mechanism and financing structure which would allow for the separation of these two debts. If a viable business in a town is employing between two and ten people and is therefore within the remit of the fund but a mortgage on an apartment will put those ten people out of work, it should be allowed to separate that debt from the company in order to protect the jobs and the enterprise. The Small Firms Association welcomes this Bill. The association also advocates proper social welfare protection for the self-employed. Potential entrepreneurs are encouraged to take risks in order to create jobs and they are helped with a small level of funding. However, if things go wrong, they get nothing. The social welfare payments for the self-employed who lose their jobs are means-tested. However, mortgage payments are not taken into account when assessing income. If the household is paying €1,500 on a mortgage out of an income of €2,000, in real terms this is an income of €500 a month and they will need the assistance of a social welfare payment but the means test does not take the mortgage payment into account. I would like the Minister to consider these five or six issues. These provisions in this Bill are a start but we need to do much more.

Note: The 30% price disadvantage mentioned above as incurred by our SMEs just on the currency factor, was misquoted. The actual figure is a 20% loss of competitiveness from January ’05 to January ’11.